Engie Brasil Energia SA
BOVESPA:EGIE3
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Engie Brasil Energia SA
Earnings Call Analysis
Summary
Q3-2024
In the third quarter of 2024, Engie Brasil Energia achieved notable operational milestones, including the start of commercial operations at 50 wind turbines and the first solar plant in the Assu Sol Complex. However, adjusted EBITDA declined by 7% to BRL 1.65 billion, primarily due to reduced participation in TAG. Net income decreased significantly from BRL 867 million to BRL 658 million, reflecting a 30% decrease. Despite these setbacks, Engie remains committed to maintaining a dividend payout of at least 55%, with a projected CapEx of BRL 10 billion for 2024 aimed at further expansion in renewable energy.
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Good morning. We're now starting Engie Brasil Energia Third Quarter of '24 Earnings Results Video Conference. I am Adriana Wagner. I would like to make a few announcements before we start the video conference.
[Operator Instructions]
I would also like to remind you that this video conference is being recorded. We made it available on our website, www.engie.com.br/investidores, and the earnings release in addition to the quarterly financial statement and other documents filed at CVM, where analysis of financial statements, operational results, ESG indicators and progress of implementation of new projects are disclosed in detail.
And before proceeding, I would like to clarify that all statements that may be made during this video conference regarding the business outlook of the company should be treated as forecast regardless of the country's macroeconomic condition and of the performance and the regulation of the electric sector in addition to other variables. Therefore, they may be changed. We would also like to remind that journalists who wish to ask questions can do so by e-mail, sending them to the company's press office.
Present Engie Brasil Energia's performance in the third quarter of '24, we have here Mr. Eduardo Takamori. And it's my pleasure to invite him to start his presentation.
Good morning, everyone. It's a pleasure to be here with you. I thank you for the interest in being here with us. There are over 120 people connected right now.
So I'm going to move on directly to the highlights. I'm very happy to let you know that we won Aneel's bid. We purchased Lot 1 with 780 kilometers length to be implemented. And this is a very strategic connecting lines that we already operate within the state of Parana. Also in the state of Santa Catarina, where our headquarters is located.
Another relevant event was that during the third quarter of '24, 50 wind turbines at Serra do Assurua Wind Complex began its early commercial operation. And we already have the equivalent of 27% of the projects totally installed right now. We have unfavorable hydrology this far, and this anticipation is very much welcome.
The third highlight is that on October 24, we had the first plant of the Assu Sol Photovoltaic Complex operating. It is all operational. We already have 15 megawatts out of the total of 755 available. In the next slide, we have the 12 issuance of debentures worth BRL 2 billion, which is a part of what we're doing to be able to comply with our CapEx for '24.
Other highlights, the awards. Anefac Transparency Trophy was awarded to the company for the 14th time. We are acknowledged as having excellent financial statements of practices. We're also awarded by the Melhores e Maiores Exame Magazine Ranking as the best energy company in the country. This will be made available in our website.
And now moving on to the highlights. Our adjusted EBITDA had a negative variation, as you can see on the left-hand side and in the order of 7%, going from BRL 1.707 billion to BRL 1.65 billion. We would like to highlight 3 main elements in the segment of generation and trading. Also, the transmission segment with BRL 16 million. But the main impact here was the lower participation of TAG. I would like to remind you that in the beginning of the year, we recycled our capital and reduced our participation in TAG, so that this in fact led to significant impact.
In the first quarter, it was part of the funding for the CapEx we need for the year. But when we evaluate for the accumulated, we went to BRL 6.8 billion -- we went from BRL 5.4 billion to BRL 6.8 billion. You can also see in the gray part our increase.
When we analyze the adjusted net income, we had a more significant reduction of about 30% of our net profit. We went from BRL 867 million to BRL 658 million this quarter. And basically, this is because of the lower EBITDA that contribution, but also BRL 160 million additional in financial costs with higher IPCA and also because of the increase of our net debt, which we will share with you later in this presentation. Because we have lower generation, we also pay less taxes.
From the accumulated point of view in the last 9 months, the results were very similar. We had an increase from BRL 2.5 billion to BRL 3.3 billion, but we also have to take into account tax contribution in the first quarter.
In the next slide, we can see the ESG indicators. And we're very happy to show that our emissions have gone down, and they have gone dramatically since we started making our last thermoelectric plant. We have results which are based on our new projects. We are watching the results carefully. Our pillar and our goal is to move on with the energy transition.
On the upper part of the slide, we are happy to share with you that we had improvement in health and safety with a frequency rate which is even lower than the same quarter last year. And this is the number of accidents per million of hours of exposure to risk. We have millions of hours, and therefore, this is very challenging. It's a license for us to operate, and we're very proud to share with you such good indicators.
On the right-hand side, we can the evolution of the percentage of women in the workforce and in leadership positions. We had advancement in leadership positions from 26% to 30%, a significant increase year-over-year and also quarter-over-quarter. We also went from 28.8% to 31.4%. In terms of innovation, we basically have the same level of investment quarter-over-quarter, with a reduction from BRL 45 million to BRL 33 million in the second quarter last year. We can see the impacts and the difference. Social responsibility investments, they continue growing and are strongly influenced by the sales of TAG in the first quarter.
Engaged people. We have a constant increase. It shows our ability to engage with the community in our activities.
And now here, in the next session, we have included a new area with operational highlights. The first one of them, we share panorama of the gross power generation. We have different impacts of the climate change. We show our consolidated results for hydroelectric generation, and this was one of our worst years in terms of hydropower. And you can see we went to 5.1 -- 4.7 to 5.1. And also the accumulated results, when we compare 9 months last year to 9 months this year, we had an increase of 40%, even in a year with very poor hydrology.
We know that actually in the first quarter, in the south of the country, we had a lot of rain and floods and destruction. And now because of a different operation, we had expressive generation in Jaguara, that contains our hydroelectric power plants in the northern region of Brazil. And this helped us offset the effects we had in the beginning of the year.
And now talking a little bit more in detail on the right-hand side, we have the generation by complementary source. This is a new graph, and I will guide you over it. Here, we can see generation in megawatts in wind, energy, biomass and solar energy, which complement our electric power plants -- or hydroelectric power plants. And you can compare the results to the previous quarter or the quarter -- year-over-year and quarter-over-quarter. And they include the assets that we purchased in the beginning of the year. So we went from 43% -- we increased 43% quarter-over-quarter. And you will see that what is outside the dotted lines had a decrease, and we will later explain this to you.
And now in the next slide, and this is perhaps the most relevant item which is evaluated by all of you, curtailment, which is also known as constrained-off. It refers to the request for restriction of generation in wind and photovoltaic plants by the National Electric System Operator. We have been saying this for a long time. The third quarter is always the most challenging quarter because it is an intersection of a more intense wind generation. It is the quarter where we generate the most when compared to solar energy, which is concentrated in the middle of the day. And therefore, we already expected this would happen, not as significantly as it did. The curtailment level was very high in the third quarter.
And when we compare for wind, you can see the results and compare them to solar, and our levels is above the average in Brazil. And of course, we expect that the fourth quarter will be better than in the third quarter and perhaps a little bit worse than the second quarter. But we know that a very important line started its operation, and it reduces curtailment effects and we will be positively impacted by that.
We also have a better expectation for the third quarter -- for the fourth quarter when compared to the third quarter.
Now, curtailment per asset. You can see the level of curtailment per region. The north is by far the region that has suffered the most significant impact. On our signed wind energy Santo Agostinho, which was just implemented, is the site with the highest level of curtailment, 30% for the third quarter and 23% for the accumulated in the last 9 months. Also, we have 35% accumulated for the last 9 months. This is our total portfolio, and this is offset by the additional generation of our hydroelectric power plants, which helped us neutralize these effects to protect our portfolio.
The most important message here for the quarter is to show our resilience. Even with such high curtailment levels, we were able to deliver results that are similar to last year.
Over to you now.
Yes. Thank you very much, Taka. Good morning, everyone. This is our traditional slide for the update on energy commercial strategy. And if you look at the gradual sale, you will see that in the third quarter, we started selling energy again in the average and long-term prices. We acted at the end of the second quarter, enabling us to close contracts. We sold in average 70 megawatts with a higher concentration in '27-'28, where we've sold over 20 mega for delivery in these 2 years. And we will have more resources available for delivery.
This is totally aligned to our strategy with a gradual sale, enabling us to deliver resilient results. We can develop a portfolio where the average price is stable if you compare. And also, the energy balance, you can see the prices here for '24, '25, '26. So this is all the result of our commercial strategy.
In the next slide, Slide #15, we have an update of the evolution of free customers. The objective is to evaluate our strategy in face of the market opening. We have intense growth. When we compare it to the third quarter of last year, it was 55%. We have clients who are moving to the free market. We are also beginning to open our market. And we have more energy to sell.
Now in the next slide, we will talk about our expansion. And you can see the implementation status of the next projects. Takamori already mentioned it briefly during his presentation, we have Serra do Assurua. It is the good news and the highlights for this quarter, not only with the anticipated started the operations, but we're also anticipating our estimate for the total operations of the complex because we anticipated we would have full operation at the end of last year, and it will happen in the beginning of the year.
And also, as Takamori highlighted, this is very important because an anticipated generation has helped us mitigate the impacts of the curtailment, which was intensified in the third quarter. This is a victory for our project development team.
Now moving on with this session. The next project implementation is the photovoltaic project. Another good news, confirming our expectation to start operations in the first quarter of '24. They started operating on October 24. 50 megawatts in average, as Takamori mentioned, and we will now have a ramp up to reach full operations by the end of next year, which also helps us with additional generation to help us mitigate curtailment in other assets.
I would like to add a comment here. If you look at this picture, in the middle that green area in the middle of the graph is a large bus. Just for you to have an idea -- so -- just for you to have an idea of how big it is. So it is very challenging, over 1.5 million solar modules, and therefore, the scale is amazing. But it's all according to plan, especially in terms of the quality required to operate the site for over 20 years -- 20 to 30 years.
Good remark, Taka, especially taking into account other projects that are being implemented simultaneously and other projects that are being implemented, such as Asa Branca. We are also evolving with this project. We have started construction, as scheduled. And despite all the challenges we had with strikes, but we will still be able to start operating with at least an anticipation -- a COD anticipation of at least 24 months.
We now have another project, as Taka mentioned in the beginning of his presentation. Lot 1 of the transmission auction we had this year, which we named, Grauna Transmissora de Energia. It is a project that will benefit from synergies. It will be implemented and connected to a substation of another asset, Gralha Azul in the state of Parana.
And we also have segments in Santa Catarina, where our headquarter is located, but we also have Espirito Santo with a CapEx of BRL 3 billion. In the first year, the CapEx is not as relevant, but we are focusing on signing contracts with providers and recruitment of the basic project, obtain the environmental license so that we can start construction as it is happening in Asa Branca. So this is another project that will be part of our portfolio in the upcoming years.
Now next slide, we have an update on the operation of the Jirau plant. We have Eletrobras Chesf with another 20%. The plant has very good operational performance. It has been kept at very healthy levels for many quarters. It is an asset that we can eventually offer for transfer and acquisition by Brasil Energia, which will evaluate it by means of a committee, which we'll discuss it with minority shareholders. And whenever we have any news, we will inform the market.
This is our last slide for this session. We summarize the expansion. And the novelty here on the left side, we have projects under construction, including Grauna. We will have the ramp-up for Serra do Assurua and Assu Sol, keeping our developing -- or portfolio for projects under construction, which will be prepared when we identify that we can have the minimum expected results to generate value to our shareholders.
I now return back to Taka.
Thank you, Rafa. We now start our pizza graph. On the right side, we can see that over the years, we have also invested more in transmission and in diversifying our portfolio. But of course, it was very difficult to develop energy generation projects at the time and we had to identify value. And even with the partial investment, we remain with more than 20% of contribution in the network. The macro number here is 20%, is for the transmission segment.
On the left side of the graph, perhaps the most relevant part of the graph is to show that even with all of the turbulences and when we had a transition in our investments where we have the CapEx of BRL 10 billion, you can see that our ROE is 26%, showing that even with the impacts we had in our EBITDA, our results are effective. As you can see, our ROE went from a higher level, 21% in the third part of '23. It went down to about 70% in '24. As -- but this is to be expected for the ROIC.
Now you can see our net operating revenue. You can see the results quarter-over-quarter. Last year, we went from BRL 2.5 billion to BRL 2.5 billion. And if you look at the details of our portfolio, basically, the impacts have been neutral. We have better financial assets. We also price in sales volume, more volume than price. We also purchased new ones and the position of the CCEE is a little bit lower, but basically, it is stable. And this is good in a diverse scenario as we have. And we had a lower acquisition costs, which offsets the results in the quarter. And now we have the contribution of transmission, but this is an increase of the construction revenue, which explains this amount.
In the next slide, we have the result of equity income. In summary, we show how TAG has contributed to our results. TAG has a net profit of BRL 1 billion in this quarter with our new participation of 17.5% in TAG resulting in the contribution of BRL 182 million via equity income to the company's EBITDA. And this is perhaps the most challenging graph, but also the most interesting. You can look at the extremity bars. We go from our accounting EBITDA. We go from BRL 1.7 billion to BRL 0.7 billion. but then we look at the adjusted EBITDA.
We also had a variation of BRL 100 billion. And when we make all of the adjustments of the Jaguara and Miranda effects and the transmission effects, we move on to the central bars, where we show you our EBITDA adjusted by the transmission quota. We had a variation of a little bit more than BRL 100 billion.
And then when we analyze more carefully, we can basically add the first 3 bars, which show the effect of our new portfolio of the new company design. We have the assets we purchased in the first quarter. We have the operation of new assets in wind energy, which result in lower energy purchase for our portfolio. We remain as an expense player, as Rafael mentioned. But we need to buy less energy because we have also expanded our portfolio in an accelerated manner.
And the hydroelectric power plants, you can see their results here. We had a positive variation. And naturally, we have more assets, you have more connection taxes and because you have generated more hydroelectric, you have to pay more royalties. So this is to be expected. And of course, we also need more staff with a generated this result. So for material and services, we had significant increases and other lower readjustments, but it's all according to plan, and there's nothing significant to be highlighted here.
Transmission had a similar performance to the same quarter last year. Equity income has a lower contribution now because we have reduced our shares in the company. And this was 1 of the main variation drivers of our EBITDA. And then you can see that this results in the adjusted EBITDA of BRL 1.6 billion.
Now the net income change. The shape is very similar. We have a net income of BRL 867 million going to BRL 658 million, a significant decrease. And then for the adjusted net income, we went from BRL 928 million to BRL 666 million, another significant reduction. Part of it is explained by the variation in scope because of TAG, and it was even higher than the BRL 3 million. We were able to offset TAG's loss with more transmission and generation. And as we had already mentioned in the opening slide, we had more financial impact. And now you see the impact on our financial results. We also paid less taxes, of course.
Next slide. Balanced debt. As we had already anticipated, we went from a deleveraged position. The green areas in this slide. We went from 2.1x. We were at 2.4x in the second quarter. And now we are 2.7x our EBITDA, which is very comfortable. And we are naturally going to increase this because of our investment commitments in generation and transmission projects.
Our gross debt today is BRL 20.5 billion. This is all according to plan. Our cash has decreased a little, but not significantly, resulting in debt of BRL 19 billion. We can still also leverage more so that we can pay dividends. And that we always strive to keep this at a level of 55%.
Debt profile and composition. We make debts in a very competitive way because of our AAA rating and robust cash generation. I do not have any highlights for profile. However, we had a variation in the composition of our debts and the indices. We had a scale of 80 or 80-plus of our debts, which was indexed to IPCA. And this generated some concern for us to protect ourselves in case of more significant variations in inflation rates. With that, the more recent issuances have used CDI so that the weight of IPCA has reduced and it is now in the order of 75%. This is part of the company's strategy to diversify our investments.
Investment plan. Basically, we have an estimated BRL 10 billion for 2024. We have invested BRL 7.5 billion. This is very linear. And this BRL 9.9 billion, we had the equity for investments in the solar complex. Serra do Assurua is something that started this year, and as of next year, we have about BRL 4 billion allocated for transmission projects. We will also conclude Serra do Assurua investments and Assu Sol with a more significant participation of transmission in the next couple of years.
As to the dividend, moving on to the last part of our slides. You can see our dividend distribution record. Whenever possible, we distribute 100% of the dividend and adjusted dividend. But naturally, because we're going through a very challenging time in the market and also because of our expansion, we made a decision to keep on paying at least 55%, which is the company's commitment, and it will not change this year or next year.
We have concluded our presentation, and now move on to the Q&A session.
[Operator Instructions]
We have a question from Marcelo Gonzales. He asks, you have some large solar and wind energy projects to start operating next year. What do you expect in terms of Constrained-off for these assets annually?
Well, we expect an equivalent level or in the same scale as this year, even though we imagine that we will have new lines operating, and they have already started operating this month. Eventually, we will have the effect of the system operator, and that helps. But at the end of the day, we still have a significant generation. But we expect that curtailment levels will remain high next year.
It depends on demand. It demands also on the aversion to risk by INS. It depends on different factors, also on new assets and on how efficient we will be in getting off GD, for example, so that GD can contribute with these results, and therefore, we will have curtailment divided among other segments as well, which would be reasonable since -- because of the levels of centralized generation. It's hard to guess what the level of curtailment is going to be. It depends on different factors.
But we are prepared, and our advantage is that we have a diversified portfolio. We have technology, a significant participation in hydroelectric energy. And that will help us with the undesirable cut of wind and solar energy.
Our next question is from Sergio Miranda an investor. He asked 2 questions. What is the company's expectation for the 2 auctions anticipated for '25 in March and September? And he also asks what is the optimal participation of the transmission sector in the company's EBITDA?
I was under the impression that we only have 1 auction for next year. But anyway, we will continue analyzing every auction. We do not have a cap for a transmission or we are always striving to obtain return for our shareholders. We are going to analyze and develop transmission projects. And naturally, when 1 auction is over, the team will try to guarantee the execution of contracts. And also, another part of the team will start evaluating future auctions so that we can participate.
To reinforce this comment. We do not have a target participation or any specific goals. If the project is good, we'll go for it.
The next question is by Yuri Santana, buy side analyst, [ Ortria ]. He asks what the expectation is for anticipated delivery for -- when compared to ANEEL's deadline for the Grauna Transmission project.
We consider an anticipation that is going to be significant and better than the deadlines established in the invitation to bid.
The next question is also from Sergio. He would like to know if according to the company's current expectation, what is the expected payout return of 100%?
This is a good question, but it's also difficult to answer. The payout return will happen when we do not have other greenfield and M&A projects. And so -- and this is difficult to anticipate. But as soon as possible, we will go back to 100% because we do not wish to deleverage very quickly. We will increase it as soon as possible.
Next question by Victor Alves. He would like to talk a little bit about the expectations and planning for the relationship with the TAG since the company has a very high margin and could further contribute with Engie's results.
TAG was an opportunistic investment we made about 5 years ago. We thought that in the beginning of the year, it made sense to deleverage and recycle our capital. Capital recycling was significant. And it made a lot of sense for us to deal with the CapEx we had for this year. And this is something that had been planned for a long time. TAG is not our core business. We are an energy generation and transmission company. It made sense at the time.
It was a part of our participation with the controller so that we could keep on having a majority participation there, but it's not our core business, and I don't see any reason for us to increase our shares there. We will continue investing in generation and transmission.
The next question is by Vinicius Santini, a physical person investor. He wants to know if we already have an established date to pay dividends in August this year -- as announced in August this year.
Well, we're waiting for the cash flow results, also taking into account our commitments for this year and next year. The date will be defined, and we will inform you. I would like to remind that the payment of dividends has to do with our cash flow and our commitments. The money is here with us, it's not with the shareholder. But while it's here, it's also generating value.
Moving on with the other questions, we had 1 from Daniel Travitzky, Safra's analyst. He would like us to comment a little bit more on the dynamics of energy commercialization. Looking at the fourth quarter, were you able to post higher contracts? How do you see the scenario from now on?
I will answer. What we've seen is a better hydrology from the third to the fourth quarter, then the rainy season has arrived. We had a lot of expectations because we had very little rain throughout '24. And this is something that we have been discussing since the beginning of the year. It was 1 of the worst years in our historic series. And therefore, we are very uncertain about the rainy season. It has a arrived and it's behaving this far. Things can change. But it's behaving according to the average and naturally, that will have an impact on prices.
We had an impact of forcing prices down, which reduces our appetite for sales. We will continue with our strategy to sell energy, but this will be done gradually. We do not want to have contracts with very low prices, with that eliminating the possibility of energy in our portfolio.
I would like to complement. It's important to note that no news is good news in this case. We have no urgency, we're not desperate in the short term. It's not going to impact our short-term results for the fourth quarter because our exposure is very limited. And so there is no justification for unexpected moves.
Naturally, when you ask us about our strategy is to sell energy for '26/'27 and '27/'28. We will choose the best moments in the market. We have seen the movements in the market in the short term. Sometimes things happen, prices explode. And then all of a sudden, they go way down. We've seen with some attention, the market developments, but we will sell in due time.
The next question is from Bruno Oliveira, analyst, sell-side. He asked 2 questions. Take into account investments and new assets throughout '25, what is the company's leverage level going to be?
Second question, just to give some guidance on our calculations, what profitability interval can we expect for new investments in transmission? Just a reference would help us.
Our rationale here, in terms of the restrictions, our restrictions today is 4.5. We have debentures and other fundings. But this is the hard covenant, but we have a soft one, which is to guarantee our AAA rating. And this is going to be in the order of 3.5x the net debt to EBITDA. So we could go to this level, where down to any major concerns and without impacting our ability to have competitive prices.
And we -- it's not going to be difficult for us to reach 3.5x. Based on our investment commitments, we don't think we will have to reach this level. In the fourth quarter, this is going to increase a little bit more. But it's not remarkable. It's as expected. If you want a more conceptual reference, it would be 3.5x. But in practical terms, you can calculate our investments, how much we need. And it's not going to be higher than 3x. So this is the reference, 3x the net debt EBITDA.
Next question from Joao Pedro Rajao, Santander sell-side analyst. He would like us to talk a little bit about our expectations for the auction next year.
We wanted the invitation to bid to come out so that we could share this with you. We have to find out whether we can be more or less competitive. We have 2 assets that can contribute Salto Santiago and Jaguara. But in fact, it depends on the conditions of the invitation to bid. The expectation is for the invitation to bid to come out as soon as possible.
The next question Andre Jesus, physical person investor. And he asks, because of the complexity of the deficiency solutions in energy transmission, what makes curtailment a persistent effect? And what is the appetite to start new projects?
Well, curtailment is not a problem in itself. Whenever you make an investment, you look at capital, CapEx, the quality of the asset and how much it will monetize, or what is the price of the energy you will be able to sell for. Curtailment reduces energy, but you still have energy to be sold. And it's not necessarily going to be sold according to fresh prices. But this happens all over the world, not only in Brazil. With this level of excess offer in our market, which does not encourage a clearer competition.
We also have a lot of subsidies. This makes it more challenging for us to invest in new products. But we do -- this is -- curtailment is something that happens everywhere, not only here. The problem here in Brazil is that it was attenuated by external factors, the competition.
The next question is from Antonio Morales, physical person investor. He asked if it is possible for Engie to sell its participation in TAG.
Yes, it is possible. In the future, we can do anything. But I would like to highlight my comment that TAG is not a core asset in an energy transmission and generation company. It can happen. We will not sell it in the short term. It contributes to the company. It has had challenges in terms of tariff reviews, but the company is well managed. There's no reason for us to sell it now.
The next question is from Dennis Santini, physical person investor. He asks if Engie is interested in participating in auctions for energy battery storage.
Yes, we are. We have it in other regions to support the system and also as a stand-alone to complement solar generation assets such as in Chile are operating as a stand-alone battery as it happens in the U.S. So we know how to operate. We are familiar with the technology. We will look into that as the government and others inform the clear conditions for the invitation to bid.
And of course, when you have the knowledge and the technology available, we've already implemented a significant number of batteries all over the world. And therefore, we would participate in invitations to bid as long as they are competitive.
Thank you, Taka. We will now end the Q&A session. We thank you all for your participation. And I turn over to Rafael and Takamori for their final considerations.
I would just like to highlight that it's always a pleasure to be here with you, answering these very challenging and interesting questions. Thank you for your questions. .
Well, thank you all very much. I think that we still have some questions that were not answered because they were repeated, but we are going to answer them all. And I would also like to let you know that in case you have any other questions, just let us know, and we will answer them.
Thank you all very much, and see you next time. Engie Brasil Energia's conference is now over. We thank you all for your participation and wish you a good afternoon.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]